Irrational Wage Growth in Brazil; Bovespa to fall another 30%?

Several economists are debating the job market bubble in Brazil. If you are a Brazilian, you know what’s happening… everyone is getting raises and bonuses like there is no tomorrow. Everyone is feeling rich. Unemployment rate is at record lows, and believe it or not, this is bad news for the economy. According to Forbes:“A job market bubble, as defined by Nomura’s Tony Volpon, would occur when companies hire more labor at a marginal cost that is greater than actual marginal revenue growth. In the case of Brazil, firms appear to be confusing rising demand with rising inflation and, in the face of a record low unemployment rate, and a limited amount of qualified labor, hoard and overpay workers despite falling output.”“Having established that the unemployment rate appears to be falling faster than broader market conditions warrant, Volpon shows that wage growth has also taken on irrational rates of growth. While wage growth should be fueled by productivity, productivity data in Brazil show that it is actually falling. While output has fallen 10% year-over-year down to 3.6% by April 2011, unit labor costs have risen to the 4% level year-over-year. And in dollar terms, given the loss of productivity suffered by the Brazilian economy given substantial appreciation in their currency, unit labor costs have grown by 110% since 2005.”“Therefore, strong labor demand in an environment of falling growth and productivity translates into falling profits and margin compression. The situation is clearly unsustainable and will lead to a correction, as “growth continues to falter and the lagged effects of monetary policy tightening continue to hit the economy, and especially the already over indebted consumer.” Full articlehere. Note how the author mentions margin compressions and falling profits for brazilian companies, but no one in Brazil (and outside) seems to see that train coming (after all, the party is in full motion)… no wonder why Bovespa is already down 15% for the year… an additional 30% correction in sight? Some fund managers in Brazil believe so (read “É melhor ficar fora da bolsa”) and are advising individual investors to stay out of brazilian equities this year. It can get ugly.